August's market volatility, driven by tech stock concerns and economic uncertainty, has investors bracing for rate cuts and geopolitical risks ahead of election season.
September Brought Change – and Resilience to the Markets
The feeling of fall is in the air, with football in full swing, cooler weather, and the slightest hint of autumn in the tree leaves. September is a month of change, and for markets, it has typically ushered in the season of volatility. With election season coming into full view, there has been no shortage of market commentary noting expectations of higher-than-average volatility. If volatility meant the stock market was supposed to lose value, then the S&P 500 index did not get the memo. While the market started off down for the month, the Federal Reserve’s long-awaited rate-cutting cycle started with a larger than average 0.50% rate cut. Strong earnings for S&P 500 companies, still low unemployment, and revised GDP estimates from previous quarters helped propel the market up 2.14% for the month.
Sectors Leading the Way: Broadening Market Returns
The S&P was led higher by sectors such as Consumer Discretionary, Utilities, Communications Services, Industrials, and Real Estate. In all, 7 of the 11 sectors outperformed the overall index. This strengthens the idea that market returns are beginning to broaden. Financials, Health Care, and Energy were the only negative performers for the month. Geopolitical conflicts in the Middle East, and Ukraine could boost the price of oil and the energy sector at any time. It is estimated that disruption in supplies from Iran could be made up for by Saudi Arabian or US production, but significant disruptions will likely send oil futures up until there is confirmation of excess capacity to offset any losses. While we are encouraged by the broadening market returns, there are still reasons to be cautious regarding US Large cap stocks. Valuations are high by historical standards, and any upticks in inflation readings could slow the path of future rate cuts.
Emerging Markets Shine Amid Global Stimulus
Emerging markets enjoyed a strong September, with the MSCI EM index returning 6.68% for the month. Chinese authorities unleashed their biggest stimulus package since 2008. While there is debate among economists regarding the ability of the stimulus to reverse the longer-term structural issues facing the economy; Chinese equities rebounded sharply to end the month. The stimulus package includes significant interest rate cuts, reduced capital ratios for banks, and decreased down payments for new home purchases amongst other measures.
Real estate and construction have played an oversized role in China’s economic success in the past few decades, and it is unlikely that similar success can be repeated in the long term but the short-term impacts to the economy and markets have been welcomed by investors. Even with the stimulus measures, we still approach China with caution.
Europe’s Struggles Continue
Developed equity markets outside the US represented by the MSCI EAFE index rose slightly to post a 0.92% gain for the month. Europe continues to struggle with war, politics, overregulation, and a lack of appealing companies. It is difficult to see a positive catalyst for European equities, particularly with the largest economies in or flirting with a recession. Political fragmentation in Europe’s largest economies is giving investors few reasons to trust what the future holds on the continent. The continued uncertainty due to the war in Ukraine doesn’t add anything positive to the backdrop. Valuations are low relative to the US, but they are low for a reason. Australia, Canada, and Japan have better prospects than European countries, but each faces challenges of its own.
Japan’s Impact on Global Markets via the Yen Carry Trade
Japan has been making an impact on global markets due to the Yen carry trade. The carry trade involves borrowing in Yen at low interest rates to reinvest in other parts of the world for a higher return. As interest rates rise in Japan, the profitability of borrowing to invest elsewhere diminishes, leading investors to sell securities to pay back the borrowed money. The S&P 500, for example, had similar patterns in August and September, dropping in value before powering higher throughout both months.
Different messaging from the Bank of Japan’s Governor and Deputy Governor regarding the future path of interest rates in Japan was influential in the drop to start each month. The surprise rate hike by the BoJ at the end of July unnerved investors to start August. This led to traders abandoning the carry trade, before resuming the trade when the BoJ walked back expectations of future hikes just days later. Markets again reacted negatively at the beginning of September as the BoJ noted that the future rate hikes were not off the table. This trade continues to be a source of volatility globally as the US and other central banks lower rates while the BoJ bucks the trend and raises rates to cool inflation.
US Fixed Income Performance
US Fixed Income returned 1.34% for the month based on the Bloomberg US Aggregate Market index. The previously noted interest rate cuts filtered into market expectations regarding the future path of rates. Savers who have enjoyed higher rates in non-marketable investments options such as money market funds, savings accounts, and CDs will see reduced income. Unfortunately, they do not have the option to sell securities at higher prices to offset the loss of income from decreasing rates. Investors with marketable Fixed Income securities such as bonds, can capitalize on falling rates by selling at a higher price.
Estimates vary for the size and pace of future rate reductions, but the Fed’s own projections show rates going lower into 2025, with most Fed representatives forecasting rates between 2.75% and 3.5% by year-end.
Precious Metals Outperforming
Gold and Silver continue to provide positive returns to investors, outpacing stocks for the year. Both metals finished the month up over 30% for the year. The demand for metals has come from central banks and individuals across the globe. India made significant changes to the import and capital gains taxes on gold in July, prompting the World Gold Council to up their estimates of gold consumption from 750 to 850 tons in 2024 for the country.
Silver has been in a deficit for several years between the amount being used in industrial applications, and the amount being mined. Increased use in Electric Vehicles (EVs) and solar panels is not expected to abate, pushing the price of silver up. Decreasing rates and a weaker dollar will also serve as tailwinds for the metals. Our positioning in precious metals has benefited from this trend.
The Unexpected Path: September’s Lessons on Volatility and Market Trends
September proved that not all volatility is bad, and what is supposed to happen isn’t always what will happen. Just like in elections and football games, market outcomes are never guaranteed. Unlike leaves in the fall, the markets can go up, even when they are not supposed to.
At Central Trust, we continuously assess the rapidly changing investment landscape for both risks and opportunities. If you are wondering how your assets translate into securing your future, a financial plan is a great place to start. Please reach out to your team here at Central Trust to create or update a financial plan. To access our full monthly outlook, please click here. As always, we are ready to help!
Investment commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.